Osborne’s horrible hybrid policies

A quiz for you. Fiscal policy can effectively be defined as the redistribution of the nation's wealth from one group to another. Monetary policy can be defined as the manipulation of the money supply. So what is quantitative easing (QE)? Is it a monetary policy or is it a fiscal policy?

It is usually considered to be the former. The Bank of England creates money and uses it to buy assets. In doing so it increases the supply of money. But look a little closer and you will see that it is a fiscal policy too. In keeping rates down and creating a series of asset market bubbles, it is transferring wealth from one group to another. Those who own equities, bonds, or property in the southeast have become much richer. Those who have been forced to buy an annuity, who rely on a fixed income or who once hoped to live on savings interest have become much poorer. So QE is actually both. It's a monetary policy and a fiscal policy (which is a very good reason why we shouldn't do it any more).

But QE isn't the only policy that isn't quite what it seems. Let's look at Help to Buy. Most people don't think of it as being an extension of QE, and technically it isn't. But the effects are likely to be very similar indeed. Regular readers will know that the Bank of England isn't the only organisation we allow to create money out of thin air. The banks do it too every time they give out a new loan they create new money along the way. So Help to Buy (as long as the banks don't replace other lending with Help to Buy lending) will give our money supply a state-mandated boost in exactly the same way as QE has.

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How much? The idea is to "underwrite" some £130bn worth of loans. That's a big number. Our total QE so far has come to £375bn, so this is another third again on top of that. But the fact that it is likely to boost the money supply isn't the only thing that Help to Buy has in common with QE. It too acts as a method of redistribution. The banks do well, the house builders do well and those already on the housing ladder do well, as do those who manage to buy on the scheme and flip before anything goes wrong. But anyone hoping to ever buy a house at an affordable price does badly. And the ordinary taxpayer ends up on the hook for the loses. QE and Help to Buy are in their final effects the same thing.

All this might give you a sneaking admiration for the government. It needs growth to get elected. So in an environment that doesn't allow ordinary fiscal policy or monetary policy to work (you can't increase government spending much and you can't cut rates any further) they've invented a few horrible hybrids. It may be that these hybrids have and will create temporary growth. But as the redistribution continues apace, we increasingly think the cost is just too high.